Key Points: 

  • Wide-moat Invocare (IVC) has received a takeover bid from TPG Global
  • Morningstar's Angus Hewitt says the takeover offer amounts to a 'steal' if it goes through
  • Invocare has a fair value estimate of $14.50 per share

Transcript


Angus Hewitt: We think InvoCare is a really good company. It's one of few companies in Australia we assign a wide economic moat, and that's underpinned by strong brand assets and cost advantages over a long tail of smaller competitors in Australian funerals. They've received an indicative highly conditional takeover bid, and we think the price of this takeover bid is actually a bit cheap. We think InvoCare is worth about $14.50 just on a standalone value. So, the downside scenario for us is that this bid actually goes through.

TPG have offered $12.65 for InvoCare. And we're not going to say TPG are robbing graves, but we do think that they're going to pick up InvoCare for a steal if it goes through at this price. InvoCare's near term has been a bit disappointing. Their annual results released in February actually showed that they might have lost a little bit of market share in Australia. But what this is due to, it's a bit more nuanced. There's been a lot of disruption since the impact of COVID. Early on, things like social distancing, people just washing their hands led to a rapid reduction in the number of deaths in 2020. And this has bounced right back to about 15% above trend in 2022. But it's not just 15% stable across the whole year. There has been spikes in excess mortality at various points in the year, and this has caused operational headaches for a big company like InvoCare that we think has meant that the smaller competitors, the mum and dad shops or the smaller regional chains, have been able to ramp up their labor force a bit more easily. And maybe they've had a bit more excess capacity to pick up some of this share. But over time, we expect mortality to normalize. And as mortality normalizes, InvoCare should be able to flex its portfolio of strong brands and its cost advantages over these smaller independent shops.

We think TPG is probably capitalizing on a weak InvoCare share price and on near-term operational headaches. But we think investors should focus on the long-term value of the InvoCare business, which is why we think the $12.65 takeover price is probably undervaluing the company.